Where have all the bonds gone?

03 Sep 2014 | Richard Kemmish


The annual release of market statistics by the ECBC is always eagerly awaited (by me, at least), but this year was special. For the first time in over two decades the covered bond market has done something truly shocking: it’s shrunk.

No doubt the securitisation market will be all over this statistic. Their market is growing rapidly at the moment, as is illustrated by the increasingly esoteric nature of their deals as much as by their volume.

But to understand the significance of the covered bond figures you really have to break them down into four types:

Covered bonds outstanding have shrunk massively in those countries where they were used heavily as central bank collateral in the depths of the crisis. This was either because of the severity of the crisis (the fastest shrinking markets are Ireland, Spain and Cyprus) or the generous nature of the central bank funding available (specifically in the UK and to a lesser extent Norway).

The only other country to have shrunk is the one that always shrinks: Germany. The long, slow decline in public sector pfandbrief outstanding is the main driver of this. Mortgage pfandbrief outstanding have fallen only slightly and might be about to start growing again according to recent research from our friends at NordLB. Pfandbrief, usually considered the first amongst equals of the covered bond market are actually now just 17% of the total market. Twelve years ago they were nearly 75%. Throw that statistic into the conversation at your next dinner party and see the reaction.

In contrast, the new kids on the block can’t get enough of the covered bond market. The biggest growth markets are Australia, Belgium and Italy. Although in the first two (as in Canada and New zealans) the market remains exceptionally small relative to GDP – so plenty more growth potential there. Throw in the developments in Asia and Latin America and this time next year the covered bond market outside the EU will be bigger than the pfandbrief market.

But the largest, and perhaps the most surprising of the four market sectors, is the majority of countries where the covered bond market has remained more or less stable. I find this particularly surprising for many reasons. Banks in those countries are under huge pressure to issue both capital and bail-inable debt. At the same time they continue to be given large amounts of cheap central bank funding and have shrinking balance sheets. It’s a wonder they issue covered bonds at all.

Maybe I am too much of an optimist, but all four of these categories suggest that this year’s shrinkage may be a temporary aberration. Mortgage lending is picking up, not least in Germany. Central bank funding can’t carry on at these levels for ever. When banks have met their new capital and bail-in debt targets, their funding mix will have to shift towards the cheapest form of term debt. And new countries continue to come online. 

In other words, business as usual for the covered bond market.


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